English can be a confusing language. The same word can have different meanings in different contexts (by 'bear', do you mean the animal, taking up arms, or putting up with someone; and is a 'ruler' a measuring instrument or a monarch?). Meaning and usage matters; more so because it is not static. Language evolves, whether by design or in response to an evolutionary development. Some refinements improve our ability to communicate effectively, others to defy logic.
The understanding and usage of the terms 'governance' and 'corporate governance' are topical cases in point. While the term 'governance' is derived from the Greek root kybernetes meaning to steer, to guide, to pilot (typically a ship), a plethora of usages have emerged over time. Today, many different usages have become commonplace. These the oversight of managers and what they do; the activities of the board; and the framework within which shareholders exert control and boards operate. It is also used to describe the board itself ("we'll need to get the governance to make that decision"). The term has also been applied in an even broader context, the business ecosystem (i.e., system of governance). The most extreme example I have heard is, "Governance can mean almost anything, it is completely idiosyncratic; different for every organisation".
Things are made worse when two related but distinct concepts are conflated. Consider the definition of corporate governance and the practice of corporate governance. The former is relatively stable. Eells (1960) coined the term, to describe the structure and functioning of the corporate polity (the board). Later, Sir Adrian Cadbury (1992) added that 'corporate governance' is "the means by which companies are directed and controlled". The fundamental principle here is that corporate governance is a descriptor—the activity of the board. Compare that with the practice of corporate governance--how a board enacts corporate governance when it is in session. The means by which boards consider information and make decisions can and must be fluid depending on the situation at the time.
The wider context merits a brief comment—the rules under which companies and their boards operate (statutes, codes and regulations), and the consequential impact of the board's decisions. These are necessary, because they define the wider environment; what is allowed and what is not. In recent years, I've heard many people include regulations and codes within their understanding of corporate governance. Similarly with the consequential impact of the board's decisions beyond the boardroom. Are either of these corporate governance?
If you'll allow a sporting analogy, it's important to distinguish between the rules of the game, the game as played, and the final score. All are necessary, but only one is the game. To embrace an all-encompassing understanding suggests that corporate governance is ubiquitous, extending across the entirety of the company's operations and the functions of management, leadership and operations—not to mention the wider system of rules of regulations. This, I am convinced, takes us close to the root of the confusion that besets many directors. Every time I'm asked, I invoke Eells and Cadbury. A framework of laws and regulations is necessary, for these define the operating boundaries. But they are not corporate governance. In asserting that corporate governance is the means by which companies are directed and controlled, Cadbury was saying that corporate governance is the descriptor for the work of the board. And work, straightforwardly, is something to be practiced. Let's not lose sight of these distinctions. The continued 'sloppy' use of language serves only one purpose: to obfuscate.
In 2014, I observed that aspects of corporate governance and board work had not changed much in 25 years. Having just re-read the book that informed that conclusion (Making it Happen, by John Harvey-Jones), I've been reflecting on the relevance of the author's comments in today's world, especially ruminations on board effectiveness and three defining hallmarks of a successful director:
Are these hallmarks still applicable in today's fast-paced, technically-savvy world?
Some commentators assert that board effectiveness is the result of compliance with corporate governance codes and various structural forms. Others, including me, place a heavier emphasis on the capabilities and behaviours of directors on the basis that the board is a social group: men and women who need to work together. (That is not to say compliance is inappropriate. It is necessary but it is not sufficient.)
With 2018 consigned to history and holiday season break all but over, most business leaders and boards of directors are turning their attention to what the year ahead (and beyond) holds. Even a cursory glance reveals a plethora of issues that may have an impact on business continuity and, potentially, continuance.
Consider these indicators:
And that's just the start.
As is usual at this time of the year, business and governance commentators have stuck their collective necks out, promulgating a variety of predictions given the indicators (as real or imagined as each indicator may be); each behaving as if they possess levels of predictive insight beyond what a reasonably educated person might be able determine by tossing a coin. But do they? They cannot all be correct—in fact, none may be.
The challenge for boards, of course, is working out how to respond.
What is becoming increasingly clear is that boards have become confused by what's going on around them. Increasing numbers have grown quite tired of 'conventional wisdoms' and so-called 'best practices' (plurals intentional). Some have responded by taking defensive positions, and others are boldly trying things without first understanding the contextual relevance.
My response to enquiries from boards is straightforward: open your eyes to the possibilities, think and act strategically, but don't be impetuous.
Helping boards respond well typically involves sharing insights from research and practice; facilitating discussions; and providing contextually-relevant and evidence-based guidance. To this end, I will be travelling extensively again in 2019: the following international trips are confirmed in my diary, and more are pending:
If you would like to discuss options to lift the effectiveness of your board in 2019, please get in touch. I look forward to hearing from you.
Much has been written about the notion of value creation since the phrase became 'hot' in business circles several years ago. Today, one does not have to listen for long to hear questions such as "Does XYZ add value?' or "What's our value proposition?"The term is dropped into sentences hither and thither, flowing from the tongue freely, as if it were an old friend. This implies that 'value creation' is front-of-mind; something that is not only topical but also to be striven for.
But what is 'value creation', and how is value created? Here's one view:
Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or the cost of capital). But some analysts insist on a broader definition of "value creation" that can be considered separate from traditional financial measures. "Traditional methods of assessing organizational performance are no longer adequate in today's economy," according to ValueBasedManagement.net. "Stock price is less and less determined by earnings or asset base. Value creation in today's companies is increasingly represented in the intangible drivers like innovation, people, ideas, and brand."
This description, from Reference for Business, reveals that 'value' can mean different things to different people. As with many concepts within the social sciences and liberal arts (of which management and governance are expressions), context is crucial. Clarity of language is needed if leaders are to be effective and businesses are to prosper. Listeners and readers must be able to comprehend messages readily. The following questions provide a useful starting point for such an enquiry:
Rather than make assumptions or assertions (think how often have you heard people claim a 'unique value proposition'), put these questions to the beneficiaries (because, rightly understood, the 'value' of anything is determined by the recipient not the creator).
Start your enquiry at the 'top' of a company. Boards should sit with shareholders and ask (or propose, if the shareholder is unclear) what 'value' looks like to them. This is the 'core purpose' question. Responses might include increased share price; a long-term market position or business model; increased market share; a social priority; or some combination of these, or even something completely different. Senior managers and staff should meet with customers (or prospective customers) and ask the same question. Ask staff themselves as well: the motivations of employees are likely to be different from those of shareholders and customers. 'Great solutions' that 'add value' to are highly unlikely to hold any sway at all if the intended beneficiary does not recognise, or is not interested in, the 'value' that is supposedly being offered. As with strategy, boards need to take the high ground, by ensuring that value created for one recipient does not erode value elsewhere. Boards need to work with management and together become crystal clear about value in a holistic sense: what it is, who the recipient is, and how it is created.
Once the value matrix (what, to whom, how and why) is understood and agreed, the answers need to be communicated in a clear and concise manner, so that effort and expectations can be aligned accordingly.
Finally, a note to boards: You have an ongoing responsibility to ensure that purpose, strategy and managerial and operational activity are not only aligned, but also the desired value (outcome, strategic goal) is actually being achieved and that it is recognised by the intended recipients. The importance of ask probing questions cannot be overstated.
An earlier version of this article first appeared in 2015.
Thoughts on corporate governance, strategy and effective board practice; our place in the world; and, other things that catch my attention.